It was a devastating terrorist atrocity designed to drive already distrustful and wary neighbours Indonesia and Australia apart, but which only served to bring them closer.

When the then barely known Islamist terrorist group Jemaah Islamiah bombed Paddy’s Bar and the Sari Club in Bali on October 12, 2002, the blast killed 202 people including 88 Australian tourists and 38 Indonesians.

The biggest mass casualty incident involving Australians since World War II brought home to Australians they were targets in the “war on terror" triggered by the US attacks on September 11, 2001.

With Australia-Indonesia relations still cool in the wake of the Australian-led intervention to stop the slaughter in East Timor in its bloody 1999 independence struggle, then prime minister
John Howard
could easily have chosen to blame and demonise Jakarta, driving the countries further apart.

But Howard opted to work with the then fledgling democracy led by president
Megawati Sukarnoputri
, ushering in a new era of police, security and intelligence cooperation in an effort to quash the threat to the hundreds of thousands of Australians who travel to Indonesia each year.

Ten years on, as the anniversary of the bombing approaches on Friday, Indonesian authorities have all but wiped out Jemaah Islamiah, brought to justice almost all of those involved in the bombings and jailed 700 other would-be terrorists.

“They [the terrorists] would have hoped their deeds would create a a greater gulf between the two countries,’’ Howard says. “As most of the perpetrators died at the hands of an Indonesian firing squad they will never know their attack had the opposite effect.

“If there can be a legacy of a tragedy such as Bali, other than the pain and grief of those who lost loved ones, then it can truly be said that out of this dreadful deed, Australia and Indonesia grew closer,’’ he says.

Related Quotes

Company Profile

The struggle against terrorism has not been without its setbacks, including a bombing at the Marriott Hotel in Jakarta in 2003 and the Australian embassy in 2004, and a second Bali bombing in 2005.

Although Indonesia still needs to maintain vigilance against the radical Islamists, it has earned the eternal gratitude of Australia.

But the tenth anniversary also offers an opportunity to assess why the relationship is not in better shape, given the foundation laid by improved security ties.

Indonesian President
Susilo Bambang Yudhoyono
, a close friend of Canberra, continued the campaign against terrorists after his election in 2004, but deliberately set out to promote a broader agenda of boosting lagging economic ties and attempting to quash the lingering “mutual suspicion’’ with which ordinary Australians and Indonesians regarded each other.

Howard would cement relations further by offering Jakarta $1 billion in loans and aid after the devastating 2004 Boxing Day tsunami, and former Labor prime minister
Kevin Rudd
championed Yudhoyono’s successful bid to be part of the influential Group of 20 following the 2008 global financial crisis.

While both governments continue to insist relations are solid, ties continue to be overshadowed by so-called “transactional issues’’. There are tensions over the handling of asylum seekers and the jailing of young Indonesian people-smuggling boat crews by Australia, Canberra’s plans to crack down on illegal logging imports, the live cattle trade and initially even the basing of more US marines in Australia.

When he assumed the post of foreign minister,
Bob Carr
insisted that lifting the Indonesian relationship “above transactional issues’’ would be one of his goals.

Carr concedes that the relationship was too dominated by “working issues’’ such as people-smuggling.

“I think a bigger investment in our relationship with Indonesia is required by Australia, and the challenge is moving the relationship beyond those transactional issues,’’ Carr says.

Indonesian Foreign Minister Marty Natalegawa suggested at a meeting of foreign and defence ministers that Indonesia “would like to describe our relations with Australia as strong’. But at the same time we recognise there is actually plenty of room for further improvement in terms of trade, in terms of investment and in terms of people-to-people relations,’’ Natalegawa said.

The East Asia financial crisis of the late 1990s held back development of closer business ties, and was subsequently exacerbated by the threat of terrorist attacks throughout most of the first decade of this century.

Indonesia is important because it is one of the economies predicted to drive world growth over the coming decades, along with Brazil, India and China. It is expected to boast a larger economy than Australia at market exchange rates within a decade, and to be one of the world’s largest economies by 2030.

It is the world’s fourth most populous nation, the third biggest democracy and the world’s biggest Muslim country.

Two-way trade between Australia and Indonesia was worth around $14.8 billion in 2011 but both countries believe business ties should be stronger, particularly given the economic potential of Indonesia’s growing middle class and its youthful population, of which half are under 30.

The balance is weighted in Indonesia’s favour because of oil imports and the recovery of the inbound tourist trade from Australia, largely based on tourist visits to Bali.

Indonesia’s economy has grown at an average 5.8 per cent a year since 2005 and 4.6 per cent in 2009, as most other countries around the globe were experiencing negative growth.

The two countries have also begun negotiating an innovative comprehensive economic partnership (free trade agreement), which began with direct business-to-business talks in Sydney in September and will graduate to the first formal round of government-to-government negotiations in Jakarta this month.

An Australia-Indonesia trade study carried out in 2010 found Australia’s direct foreign investment in Indonesia could rise by $6.2 billion by 2030 if all restrictions on foreign equity and operations were lifted.

The partnership was agreed to by Yudhoyono and Prime Minister
Julia Gillard
on a visit to Jakarta in 2010, but the start of negotiations was delayed by the separate ASEAN-Australia-New Zealand Free Trade Agreement negotiations.

The Gillard government’s “Asian Century" white paper, to be released later this month, is expected to contain a substantial section on the importance of forging stronger ties with Indonesia.

Business remains concerned about behind-the-border barriers in Indonesia applying to some sectors of the economy, difficult and prolonged approvals processes and corruption.

But trade analyst
Alan Oxley
says Australia is still not “putting in the effort required’’ to elevate Indonesia to Australia’s first rung of relationships, where it belongs.

“We consistently do not seem to get it right with Indonesia, but structurally there is a mismatch between our export strengths and where Indonesian market opportunities lie.

“In agriculture, notwithstanding the hiccup of the live cattle ban, we are doing OK, wheat too, but areas like finance, education, services and infrastructure are difficult because these sectors are relatively uncompetitive in Indonesia,’’ Oxley says.

Indonesia’s investment promotion chief, Muhammed Chatib Basri, has warned that Indonesia needs to move away from relying on cheap labour production and its extractive resource industries if it is to fulfil its potential as the third driver of an Asian economic renaissance alongside China and India.

Indonesia had watched the development of South Korea, South Africa and Brazil – but only one, South Korea, had turned itself into an industrial economy while the other two still relied heavily on resources.

Basri has signalled Indonesia’s intention to move into downstream production and greater use of technology, areas that will offer greater opportunity for foreign investors in training and education, and areas where Australia is strong. With an election due in Australia in 2013 and in Indonesia in 2014 the two countries are probably headed for a further period of transition which will need to be carefully managed.

As Indonesia’s constitution limits presidential terms to two, Yudhoyono will step down at the end of his second term and Australia may find the next Indonesian leader is not as committed to forging closer ties between the two countries.

Opposition Leader
Tony Abbott
has also vowed to strengthen ties with Indonesia if the Coalition wins the 2013 election.

But Jakarta has expressed strong opposition to his declared policy of turning back asylum seeker boats – another issue that could sour relations.